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Forex Blog - Volatility Played the FX Market as Dow Whipsaws Continue

Volatility Played the FX Market as Dow Whipsaws Continue Last Updated 10/17/2008 5:16:01 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

AUD/NZD ( +150 pips or +1.43%)

NZD/JPY ( -85 pips or -1.39%)

NZD/USD ( -71 pips or -1.12%)

THE STORIES IN THE CURRENCY MARKET

  • USD: VOLATILITY PLAYED THE FX MARKET AS DOW WHIPSAWS CONTINUE
  • EUR: TRADE BALANCE WORSENS MORE THAN EXPECTED AS ECB LENDS 5.3 BILLION TO HUNGARY
  • GBP: TRADING CONSOLIDATION BECOMES NEW TREND IN GBP
  • JPY: A WORSE THAN EXPECTED TERTIARY INDEX HELPS LOSE SOME JPY CREDIBILITY
  • CAD: TRADERS ARE EXPECTING A 50BP CUT FROM THIS WEEK’S MEETING
  • AUD: GOLD LOSSES MORE THAN 2.0%, WHILE SILVER FALLS 4.1%
  • NZD: NZD LOSSES AGAINST THE USD IN TODAY’S VOLATLE SESSION

EXPECTATIONS FOR UPCOMING FED MEETINGS

 

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

VOLATILITY PLAYED THE FX MARKET AS DOW WHIPSAWS CONTINUE

Dow trading today does not extinguish the prevalence of extremely large swings in equity prices. We have seen it for much of this month, and we are seeing it again today. After opening down more than 2.0%, the Dow rallies back, breaking the 9000 level, and is now trading down more than 100 points. As we have seen recently, the true direction of the markets can vary significantly during the last hour of trading. Ironically this week has seen one of the best weekly gains in more than twenty years. This is despite Wednesday’s 700 point fall.

More Bad News in Housing Starts and Consumer Confidence

US Housing Starts fell an addition 55K this month, coming down to 817K. An even more important indication of economic activity, Consumer Confidence, proved to be another disappointment. The fact of the matter is that in order to rally off of recent lows, there must be some fundamental reason for doing so. In this latest release of deteriorating figures, any jump in the Dow seems to be the result of shorts covering their positions or based on psychological factors. The index of consumer sentiment fell to 57.5 from 70.3 in September. This move is the biggest monthly decline in the report for 30 years. Consumer spending, which represents about two-thirds of the economy, fell because of the deterioration of trillions of dollars in wealth caused by severe stock market swings. Consumers have reported devastating losses to retirement accounts as well as personal investment accounts as a result. In addition, the continuous monthly declines in employment coupled with heightening unemployment rates reduces spending significantly. It is likely that consumers will keep their wallets closed well into the holiday season which will significantly weigh on future retail sales. Housing Starts, which indicates the amount of new houses being built, has hit new multi-decade lows. Coupled with the weakness in Consumer Sentiment, we can see the domino effect of consumer spending in relation with Housing Starts. We have all seen the recent plight in the housing situation, but because of new lows in Consumer Sentiment, such trends may not be reversing anytime soon.

Prospects for Improved Information this Week

On schedule for this week are more indicators related to consumer spending and housing conditions. We are expecting Leading Indicators for Monday, ABC Consumer Confidence on Tuesday, Initial and Continuing Jobless Claim on Thursday, and Existing Home Sales on Friday. Through recently released numbers, we would have little reason to expect improvements in Consumer Confidence or Home Sales. As long as spending is down, there will be no pick up in home purchasing. Initial and continuing jobless claims will give us an idea of whether or not employment figures for October will be the ninth consecutive month of negative job growth.

TRADE BALANCE WORSENS MORE THAN EXPECTED AS ECB LENDS 5.3 BILLION TO HUNGARY

The Euro-Zone Trade Balance was reported worse than expected this morning. The long-standing net exporter now has reported two consecutive months of trade deficits, with this month’s figure widening the deficit to -5.5 billion. The ECB shows by example that it will make new and innovative strides in fighting a global recession by extending an emergency loan to the country of Hungary. With a package that totals $6.75 billion, this action represents the first time that the ECB has made a loan to a country outside of the EZ. Policy makers felt that the faltering country would spell problems for the entire European continent, while hoping that such a gracious act will persuade Hungary to become part of the EZ. Such action is exemplary of the flood of new recession-fighting innovations, as the UK may lose its place as the leader of such policy implementation. EUR/USD trading today remains within the current range and is slightly negative on the day. Germany is expected to announce Producer Prices by Monday, largely expected to remain unchanged. In addition, Italian Retail Sales will come in on Wednesday, French Consumer Spending on Thursday, and German and French PMI by Friday. Switzerland has announced a rescue plan for UBS totaling $5.3 billion in order to preserve confidence in their most important sector. Rival Credit Suisse announced that they will raise up to $9 billion through private investors. Switzerland has been known as the safe haven for investments and banking, and is apparently willing to take action to preserve such a connotation.

TRADING CONSOLIDATION BECOMES NEW TREND IN GBP

Trading in GBP/USD reflects the overwhelming uncertainty present in today’s markets. Consolidation has been the story of the day, a trend that we have not seen in several weeks. Today has seen action maintain itself within about 150 points, quite a small movement compared to recent trends. We expect that trading will likely consolidate and remain range-bound. Any significant market moving news will have to be in the form of new bail-out plans in which the UK has been the maverick in creating. News about Prime Minister Gordon Brown’s proposed G8 meeting, already dubbed as Bretton Woods 2, will likely be another factor that will move prices in a more definitive direction. There are a few economic releases scheduled for next week including Sunday’s Rightmove House Prices Index, Monday’s Retail Sales, and later in the week is the important GDP report. Therefore by week-end we should be able to further predict growth prospects for the UK.

A WORSE THAN EXPECTED TERTIARY INDEX HELPS LOSE SOME JPY CREDIBILITY

The Japanese economy was hit hard recently by a faltering export industry. The Japanese Tertiary Index was released today and proved to be an additional harbinger as the index falls to -1.4% compared to a report of 1.2% last month. The Tertiary Index gives insight into the domestic economy while largely ignoring the exporting industry. These results should serve as a final blow to the question of whether or not the Japanese will be able to weather the storm. The JPY has largely gained credibility as traders were focused on the continuous announcement of bail-out plans from other industrialized countries. Yet the Japanese markets have been deteriorating just as badly, as the Nikkei average has fallen a total of 50% this year in comparison with a 35% fall in the DOW YTD. The recent run up in the JPY seems entirely the result of risk aversion without any fundamental reasoning. Today’s trading reflected much of the Dow’s volatility. While trading has seen prices within a 120 point range, the pair remains largely unchanged. Monday the BoJ is releasing Convenience Store Sales which can give us further insight into consumer spending and the domestic economy as a whole.

METALS CONTINUE FALLING AS COMMIDITY CURRENCIES REMAIN LARGELY UNCHANGED

After the losses posted yesterday in a broad range of commodities, oil manages a rally of more than 2.0%. Price action in metals such as gold and silver continue to extended losses. Gold losses more than 2.0%, while silver falls 4.1%. This is all on the wake of yesterday’s 4.1% loss in gold and a 5.3% loss in silver. Yet commodity currencies continue to be resilient and are able to maintain yesterday’s advances with AUD posting mild gains in today’s volatile trading session. CAD and NZD lose some gains. Aussie export prices were seen climbing to 13.8%, while import prices rose to 5.0%. Early next week we are expecting Aussie PPI and Kiwi CPI. CAD traders will have to hold their breaths until Tuesday when the BoC rate decision will be announced. Despite recent upbeat reports of employment and manufacturing, traders are expecting the BoC to cut by 50bp, which would be in addition to the 50bp the BoC cut on October 8th. The recent gains in USD/CAD may be the result of traders pricing in such a rate cut.

AUD/USD: Currency in Play Over the Next 24 Hours

AUD/USD will be our currency pair in play for the next 24-hours. Monday Australian Producer Price numbers will be released at 8:20 pm ET or 00.30 GMT.

AUD/USD is able to maintain a rally that brings it out of the Bollinger Band sell zone. Upcoming resistance levels are determined by using Fibonacci retracements extending from mid-July highs to October 10th lows. The 23.6% resistance lies at 0.7160 and will be the most immediate level facing the pair. Support will be the previous low placed on October 10th, lying at 0.6329. Breaking out of the sell zone was the first step in a potential rally in AUD/USD. On its way up, prices will have to break numerous resistance levels in the form of the Fibonacci levels.

 

About The Author

Lien has extensive knowledge within the interbank market, particularly in trading spot FX and options. She has written for numerous publications, is frequently quoted on financial media outlets, and is the author of several books, including Millionaire Traders. Read more >>

DISCLAIMER: This forum and the information provided here should not be relied upon as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. This forum and its information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision based upon this forum or any information contained within. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Kathy will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Kathy do not render investment, legal, accounting, tax or other professional advice. If such advice is sought, or other expert assistance is required, the services of a competent professional should be sought.



 

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